The High Cost of Discrimination

Why the cost of discrimination in terms of race, gender or sexual orientation is so high, and why prejudice makes us all poorer.

This is Part 1 of a series of articles on the importance of diversity. Today we look at how discrimination is actually making organizations, and countries, poorer. In the next installment, we’ll look at diversity and corporate boards.

In international business circles, prejudice against people for their racial, sexual, ethnic or religious background has long been considered morally wrong, but a growing number of economists have concluded that it’s also a very expensive habit. A number of studies suggest that the world would be billions if not trillions of dollars richer if opportunities were offered more equitably. For example,

• In the Arab world, for example, researchers estimate that gender inequality leads to an average income loss of 27% in the Middle East and North Africa, 19% in South Asia, and 16% in Central Asia, according to a 2013 study by professors at the University of Sheffield and the University of Barcelona.

• In the US, if educational and health services were made more equal and the average income of minorities raised to the average income of whites, total earnings of US workers would increase by 12% or nearly $1 trillion, and the gross domestic product would rise by $1.9 trillion. If by 2030, the government could close that earnings gap by improving access to healthcare and education, the country’s GDP could increase GDP by 16%, according to a 2013 study of the W.K. Kellogg Foundation.

• Discrimination against lesbian, gay, bisexual and transgender (LGBT) people in India may cost the country as much as 1.7% of its GDP, according to a recent World Bank study.

Why is the cost of discrimination so high?

“Discrimination is costly because companies are giving up people with good skills, or those workers are being put into jobs that don’t fully use their skills and productive capacity,” says M.V. Lee Badgett, a professor of economics at the University of Massachusetts at Amherst and a Williams Distinguished Scholar at the Williams Institute on Sexual Orientation Law & Public Policy at the University of California at Los Angeles School of Law, and author of the Indian homophobia study.

“Besides making recruiting and then retaining employees harder, the company loses out on what that worker might have produced and has to take time and money to search for and then train a new person. So it’s not a good business model,” Badgett adds.

There is a macroeconomic impact as well. Countries that put all their talent to work are richer than countries that don’t, not just because there are fewer goods and services produced, but because their economy tends to be less efficient. The Sheffield-Barcelona study, for example, estimates that in countries where women are excluded from entrepreneurship, average output per worker drops by 12% as the overall talent pool of entrepreneurs is smaller. Similarly, a country with no women in its labor force would see its per capita income by almost 40%.

Depending on the targeted group in question, there may be other costs too. With respect to women, fertility rates tend to be higher in countries where women aren’t allowed to work outside the home, depressing incomes, according to one 2007 study by professors at the University of Cambridge and the University of Lisbon. The professors estimate that the rise in fertility actually doubles the impact of women being kept out of the labor market.

When the gender imbalance begins not in the workplace but in the maternity ward, there may be a different but just as dangerous set of macroeconomic effects. In China, Columbia University professor Shang-Jin Wei argues, the skewed sex ratio that has resulted from the Chinese response to the government’s one-child policy contributed 30-48% of the rise in property prices in 2003-2009 as men competed for a scarce number of women. In fact, he claims that the excessive savings rates of these hard-working bachelors may be responsible for the world’s current low interest rates. He estimates that they have contributed as much as half of China’s current account surplus, which in turn has helped fund US current account deficit.

The case for a more inclusive global economy is strong enough that the president of the World Bank, Jim Yong Kim, has made equal opportunity a central message of his presidency, and the bank is increasingly trying to tie loans to a country’s progress in reducing these barriers to opportunity. “There is clear evidence that when societies enact laws that prevent people from fully participating in the workforce, economies suffer,” he wrote in a February 2014 editorial.

At first glance, it might look as if Kim is using his position to push a particular political agenda. Looked at from another angle, however, and it seems entirely justified, given the fact that many of the prejudices that impoverish people now have their roots in deliberate economic policies.

In the Americas, for example, until the 1660s, Africans weren’t treated much differently than indentured white servants for most of the 16th and 17th century. In the early years of settlement, black and white servants actually got on well together, and nobody seems to have even been much concerned about mixed marriages.

“They were certainly not well off. But their ill-fortune was of a sort they shared with men from England, Scotland and Ireland, and with the unlucky aborigines held in captivity,” wrote Harvard historians Oscar and Mary F. Handlin in a 1950 essay. But over the next 50 years, they concluded that British colonial authorities forged a legal apparatus that turned those African servants into an irredeemable underclass.

Others agree. “Some historians think the Europeans in the New World enslaved Negroes primarily because they were racists… I incline toward the alternate view, that whites enslaved blacks because they discovered this sort of labor system worked very well. Economic exploitation seems to me the prime motive: racism conveniently justified and bolstered the use of forced black labor,” wrote Richard S. Dunn in his 1972 book Sugar and Slaves: The Rise of the Planter Class.

In the 20th century too, a similar process played out in South Africa, where blacks were not allowed to own property or start a business on the European side of the economy, and barred from many occupations. During the apartheid era, blacks “were purposely kept unskilled and barred from high-skill occupations so that skilled white workers would not face competition and could enjoy high wages,” according to a 2010 MIT paper titled ‘Why is Africa Poor?’

No wonder that in the end some scholars have argued that prejudice, and racism in particular, is best understood not so much as the product of ignorance, but almost as a kind of rhetorical device used to justify oppression. As French sociologist Albert Memmi once noticed, “If there is no difference, the racist invents it; if it exists, he interprets it to his advantage.”

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